§ Statement of Purpose

The View from 1776 presents a framework to understand present-day issues from the viewpoint of the colonists who fought for American independence in 1776 and wrote the Constitution in 1787. Knowing and preserving those understandings, what might be called the unwritten constitution of our nation, is vital to preserving constitutional government. Without them, the bare words of the Constitution are just a Rorschach ink-blot that politicians, educators, and judges can interpret to mean anything they wish.

"We have no government armed with the power capable of contending with human passions, unbridled by morality and true religion. Our constitution is made only for a moral and religious people. It is wholly inadequate to the government of any other." John Adams, to the Officers of the First Brigade, Third Division, Massachusetts Militia, October 11, 1798.

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Thursday, November 08, 2007

Chickens Are Returning to the Roost

Since the recovery from the 1999 dot.com bust, we have benefitted from cheap imports that kept inflationary pressures down. Our financial markets have been flooded with dollars from foreign holders, which meant low interest rates and a booming stock market.

That is coming to an end, unless the Federal Reserve reverses course and ceases its efforts to manage the economy by flooding it with excess money.

China, Middle Eastern oil producers, and other exporting countries have to raise the dollar prices on goods they export to us to compensate for the declining value of those exports in their own currencies. Some exporters are beginning to refuse payment in dollars, requiring payment in Euros or their own currencies.

An article in the November 8 edition of the Washington Times summarizes this latest development:

China roiled financial markets around the globe yesterday when it asserted that the dollar is losing its luster as the world’s reserve currency and that Beijing will swap some of its $1.4 trillion in reserves out of U.S. dollars and into stronger currencies like the euro and Canadian dollar.

China’s verbal assault on the dollar helped trigger a 360-point plunge in the Dow Jones Industrial Average and came as French President Nicolas Sarkozy warned in a speech to Congress that the “disarray” caused by the dollar’s steep fall could lead to “economic war.” ...

With the world’s largest reserves of dollars, China has been a major investor in U.S. Treasury bonds and debt securities and is the second-largest holder of U.S. government debt next to Japan.

President Roosevelt was advised by his Brains Trust of socialist economists that centralizing management the entire economy, for the first time in the history of the United States, would enable the Federal government to restore full employment and raise farm prices.

To accomplish that end, among other things, the President had to bring the Federal Reserve system to heel by limiting the independence of the 12 regional Reserve banks and centralizing power in Washington at the Federal Reserve Board. By appointing a Federal Reserve Board chairman who thought as he did, President Roosevelt could manipulate the entire banking system. In 1934 he got his ideal man in Marriner Eccles.

The Wikipedia entry on the subject states that, in testimony at a Senate hearing before his appointment, Eccles had advocated a collectivistic social and economic policy: [Eccles] suggested that the federal government spend money on unemployment relief, public works, and aid to farmers. Eccles also advised some long-term solutions such as federal insurance for banks, a centralized Federal Reserve System, tax reforms, a minimum wage, unemployment insurance, pensions for the elderly, and governmental regulation of the stock market.

When the Federal Reserve was created in 1913, President Wilson, Congress, and the bankers had differing ideas about its primary role. On balance, until the late 1920s, the Fed was a more or less traditional central bank, seeing its mission as maintaining the value of the dollar and acting as lender of last resort to banks in credit squeezes, while encouraging banks to maintain sound lending practices.

Our national economic paradigm, from the early 1600s until 1933, under which the United States become the industrial and agricultural powerhouse of the world, rested upon sound money policies, private property rights, personal responsibility, and individual initiative. The socialistic idea of collectivized regulation of the entire economy, embodied then principally in the Russian Soviet and Italian Fascist systems, was literally foreign to us.

Bank loans, before the creation of the Federal Reserve system in 1913, were made from people’s savings and business profits deposited in banks. Growth of lendable funds thus tracked real underlying growth of the economy. Businessmen knew that, if banks had more money to lend, it was because consumers had earned enough to buy more products.

The Federal Reserve’s ability to create money by lending to banks first got out of hand in the 1920s, when over-expansion of credit gave false signals to business and caused massive over-investment in new production facilities. This, coupled with high tariffs against imported goods, started the Great Depression in 1929.

Currency stability before 1933 depended upon the gold standard. With Federal debt payable in gold and paper money convertible into gold at the holder’s choice, inflationary policies would have meant losses of Treasury gold reserves to domestic holders of debt and to foreign banks.

The beauty of the system was that it was automatic. Politicians couldn’t get away with unrestrained, inflationary Federal spending. To fund new Federal spending in amounts greater than incoming tax revenues, Congress would be compelled to pass new taxes and suffer the voters’ wrath. The Fed could not, as it does today, create inflationary amounts of money, because, until 1933, currency in circulation and in bank deposits had to be held within a prescribed ratio to the the Treasury’s gold reserves.

President Roosevelt replaced our nation’s heritage with a liberal-progressive-socialistic system in which the Treasury and the Federal Reserve controlled the dollar price of gold and the value of the dollar, while the new alphabet-soup Federal agencies managed agriculture and industry.

New Deal socialism, unfortunately, was completely ineffective in getting us out of the Depression. But President Roosevelt was successful in devaluing the dollar and jump-starting inflation, which has continued, except for brief pauses, since then.

Having learned nothing from historical experience, liberal-progressive-socialists have kept their faith that every social and political ill can be cured only by more Federal spending.

So, hang onto your hats after next year if Congress enacts massive new welfare-state benefits programs, raises taxes, and panders to labor unions by raising tariffs, restricting free trade, and curbing outsourcing of over-paid American jobs. The prospect is for a re-run of 1970s stagflation.